* Could sell up to $230 million worth of common stock
* Estimates negative cash flow for third quarter
* Expects to write down finished goods, inventory (Adds context on rare earths, analyst comment.)
Oct 15 (Reuters) - Rare earths producer Molycorp Inc said on Tuesday its cash cushion has dwindled to insufficient levels and announced its second major financing in less than a year, sending shares of the one-time market darling down more than 15 percent.
Rare earths prices skyrocketed in 2010 and early 2011 as China clamped down on exports of the metals and oxides used in high-tech products like smartphones and hybrid vehicles, sending Molycorp stock racing.
As customers found alternatives to some rare earths and China relaxed export controls, mining and processing the materials became a very tough business.
Molycorp's shares, which rose as high as $79.12 in May 2011, fell 17 percent early Tuesday to $5.88 after the company said it could sell up to $200 million of common stock, or $230 million if its underwriters exercise options.
It raised $414 million earlier this year, in part to finish expansion and modernization at its main mine, Mountain Pass in California.
Mountain Pass could make Molycorp much more competitive, but ramp up is taking longer than expected, and sluggish demand has cut cash flow.
Baird Equity Research analyst Ben Kallo said the offering was likely the biggest weight on the share price on Tuesday.
"That doesn't leave a good taste in anyone's mouth," he said. Some had speculated that Molycorp would have to raise more money, but "there was a camp that believed they could get through it without issuing more equity."
Kallo sees potential in the Mountain Pass project, which he said could make Molycorp the lowest cost rare earths producer, even compared with China's industry.
Molycorp, based in Colorado, also said it expects negative cash flow for the third quarter, due in part to lower production, demand and prices. It expects to write down finished goods and inventory in the quarter, partly due to high production costs and slow moving inventory.
Molycorp said it may be unable to sell a substantial portion of the cerium produced at Mountain Pass in 2014. The site's main ore material is bastnasite, and about 49 percent of the rare earth material in that ore is cerium, traditionally a lower demand product. (r.reuters.com/wac83v)
Molycorp also announced a deal with its largest shareholder, Chilean molybdenum processor Molibdenos y Metales S.A. - or Molymet - under which, at Molycorp's request, Molymet could purchase up to $50 million worth of common stock.
Molycorp does not expect to trigger the deal if its latest share offering is successful.
Molycorp raised $414 million in common stock and convertible notes offerings completed on Jan. 30, 2013. As of Monday's close, its market capitalization was $1.34 billion. (Reporting by Allison Martell in Toronto and Garima Goel in Bangalore; Editing by Maju Samuel, W Simon, Janet Guttsman and Andrew Hay)